European shares rally on German growth hopes

* Euro STOXX 50 up 0.7 pct, hits fresh 18-mth highs

* Strong Ifo helps German DAX outperform

* Investor optimism seen fuelling further mkt gains

By Toni Vorobyova

LONDON, Jan 25 (Reuters) - European shares scaled fresh
multi-month peaks on Friday, with forecast-beating German data
and bigger-than-expected paybacks of crisis-time loans by banks
fuelling the conviction that the region is on the recovery path.

Frankfurt's DAX index led the rally, scaling
five-year highs and closing 1.4 percent higher after the
closely-watched Ifo January business morale index beat the
consensus to match the most optimistic economist's forecast.

Confidence in the euro zone recovery was further bolstered
by news that banks will repay 137 billion euros ($183 billion)of
European Central Bank crisis loans next week, around a third
more than expected.

"People are choosing to pounce on any bit of good news. For
the moment the trend is very much to the upside," said Stephen
Walker, head of equities research and market strategy at
Ashcourt Rowan.

"From a really deep fundamental standpoint I probably still
have some pretty major concerns but at the moment the market is
not in the mood to worry about that. It's a sentiment thing -
people have gone from being extremely pessimistic to being far
more optimistic. At the moment any news is good news."

The EuroSTOXX 50, up 4.1 percent so far in January, is on
track for an eighth month of gains, extending its longest bull
run since 1998, but is still 67 percent below the peaks of 2007.

In a further signal of stronger appetite for risk assets,
implied volatility on the euro zone blue chip index fell to
fresh six month lows.

The improved economic backdrop and stronger investor
confidence has enabled investors to focus more on company
specific factors, boosting the performance of stock pickers.

"Quite understandably, people are beginning to differentiate
more between markets and, even within, so it is definitely more
of a stock picker's world," said Andrew Milligan, head of global
strategy at Standard Life Investments.

"The tech sector sums it up perfectly ... We are all well
aware that smart phones are the theme to play but within that
you are very definitely seeing winners and losers."

Nokia came out as a loser, extending Thursday's
sharp drop as the Finnish handset maker's plans to scrap
dividends for the first time in its recorded history fanned
concerns about its cash position.

On the gainers' board, Bayer was the top
performer among European blue chips, after Bank of America
Merrill Lynch added the drugmaker to its "Europe 1" list of
preferred stocks.

"Valuation remains attractive with shares trading at circa
11 times expected 2014 earnings despite premium growth," BofAML
analysts said in a note, targetting a share price of 84 euros on
the stock against 75.92 euros currently.

"We continue to believe product launches will reinvigorate
top line growth and improve investor sentiment."